Dedicated emerging market (EM) foreign investors, Wood noted, may no longer be ‘overweight’ on India given a combination of sustained outperformance and strong domestic inflows prompting a potential shift in foreign investor sentiment. However, Chris Wood continues to have a positive structural view on India’s domestic demand cycle.
Another reason for the foreign investor outflows, as per Wood, is that expensively valued midcaps are continuing to outperform blue chips, leading to a scenario where portfolios of many FPIs are underperforming.
“This is the context where more expensive mid-caps have continued to outperform blue chips with mid-caps accounting for about 60 percent of the inflows but only 30 percent of market capitalisation. This is the backdrop against which many foreigners’ portfolios have been underperforming,” it stated.
As a result, two prominent high-profile sectors – private sector banks and IT services – that have been traditionally owned by foreigners and historically accounted for a large share of the Nifty have underperformed in the recent past, he pointed out.
The Nifty Private Bank index has lagged behind the Nifty 50 by 14% since reaching a relative peak in May 2023 and by 30% since its relative high in March 2019, according to the report. Similarly, the Nifty IT index has underperformed the Nifty by 15% since mid-February and by 34% since its relative high in late December 2021.
Since the start of 2024, FPIs have been net sellers of a little over $3 billion in Indian stocks.
A Correction on Cards?
As per Wood, the Indian stock market could experience a correction. Wood identified a potential trigger for this correction – a surprisingly poor outcome for the incumbent Bharatiya Janata Party (BJP) government led by Narendra Modi in the Lok Sabha election. However, Wood also acknowledged that Modi’s tenure has brought significant positive changes to the lives of ordinary citizens over the past decade, making a repeat of the BJP’s unexpected defeat in 2004 highly improbable.
“Still it is entirely possible, if not probable, that the ruling party does not do as well as the BJP was hoping following its unexpectedly positive performance in the state elections held in November. Still even if the BJP wins by ‘only’ the number of seats in the 2019 general election that is quite enough to run the government as the past five years have demonstrated,” Wood said.
Christopher Wood further pointed out a potential second reason for a stock market correction in India – changes to the capital gains tax structure expected in the forthcoming full Budget later this year. Wood raises concerns about whether the tax rates will increase, if the period to qualify for long-term gains will be extended, or if a combination of both measures will be implemented.
“The reason that such proposals are apparently under consideration is growing evidence of retail speculation, most particularly in the options market where India has options for individual stocks. Such paper speculation is unlikely to be viewed as healthy by Modi, or indeed the BJP. GREED & fear’s probably correct assumption is that the Indian Prime Minister has a natural suspicion of those making money out of money, most particularly in a zero-sum game like options,” Wood said.
Surge in Banking
The report highlighted that private sector banks, which have consistently been part of the Greed & Fear portfolio, have experienced significant outperformance since the end of 3Q 2002. Their exceptional performance has been a key driver of the portfolio’s overall outperformance over the past 22 years.
However, private sector banks, Wood believes, also face a near-term issue, which is the regulatory pressure from the Reserve Bank of India (RBI) to slow loan growth in the retail segment, particularly in the area of unsecured loans, and to “manage” loan-to-deposit ratios.
“There is a growing narrative, which is probably correct, that the private sector banks have seen their best days. This is partly because the best customers have already been acquired while public sector banks, which still account for 61% of deposits, have become more competitive helped by Narendra Modi’s structural reforms such as the Insolvency and Bankruptcy Act of 2016,” the report said.
However, it emphasises that this doesn’t imply private banks lack investment potential. Instead, for value-oriented investors, they are becoming increasingly appealing due to their approaching valuation levels. A prime example of this shift in dynamics is HDFC Bank, which has seen a de-rating following challenges arising from its merger with HDFC, noted Wood.
Despite banking shares lagging, Greed & Fear’s India portfolio, with a 23 percent weightage to private banks, has outperformed the Nifty by 48% since early February 2023. This remarkable performance is attributed to the portfolio’s exposure to “hot” sectors such as real estate, energy, and capital expenditure plays.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.
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Published: 24 May 2024, 01:05 PM IST
